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AOL founder and prominent tech investor Steve Case launched a Rise of the Rest campaign in 2014 to advance entrepreneurship in America’s overlooked cities. He built the campaign on a problem that suggested massive opportunity—75% of venture capital is deployed in three cities (San Francisco, New York and Boston).
Case and his team completed eight bus tours with visits to 43 cities between 2014 and 2020. This led to 200 investments from two $150 million funds. Some of those deals are co-investments with Commonwealth.
Inspired by Rise of the Rest, Commonwealth hosted pitch competitions in Indianapolis, Tampa and Raleigh to demonstrate that investing at the local level is a premium strategy to achieve both impact and strong returns for investors.
In November 2018, Commonwealth held its first city-level pitch competition at Bankers Life Fieldhouse. US Senator Todd Young delivered remarks on his recent Social Impact Bonds legislation and Indiana Pacers vice chair Jim Morris explained how Indianapolis used sports to revitalize its downtown economy.
Keeping with the sports theme, former Indianapolis Colts star Marlin Jackson was one of the entrepreneurs who pitched at the event. Colts fans recall that Jackson famously intercepted Tom Brady’s final pass in the 2006 AFC Championship Game to end the Colts playoff frustrations against the Patriots; the Colts would go on the win the Super Bowl a couple weeks later. Now Jackson was using his gridiron glory to help struggling families pursue the American Dream.
Nearly one-third of Indianapolis’ Crown Hill neighborhood residents live below the poverty line. Affordable housing is scarce and the local community development corporation faced a shortage of developers willing and able to build new homes. Enter Marlin Jackson, whose Revive Property Group was established to help kids avoid the trouble he faced while growing up in Section 8 housing.
Commonwealth invested in their first project, building two homes on Graceland south of embattled 38th Street in Indianapolis. Their next-door neighbor, Dana Miller (aka Miss D) has lived in the neighborhood for 25 years. When she bought her home from her “auntie” 25 years ago, it was a nice place to live. But now the alley behind her house was a place for drugs and prostitution. When the property owner next door moved out, the homeless moved in. After eight years of vacancy, the city demolished the house.
Marlin and his team selected that vacant lot to begin building homes and hope for a neighborhood desperately needing it. As the beautiful new construction took shape, a light was turned on in this forgotten neighborhood. US Senator Todd Young visited. The Indianapolis Business Journal published a feature story. And Miss D made a lot of new friends.
Meet the winners of the 2018 Indy Pitch Competition:
Commonwealth formed a partnership with the National Christian Foundation (NCF) office in Tampa to host a pitch competition to prove that impact investing can produce superior economic returns alongside a meaningful social improvement. The NCF investors created a pool of over $1 million in seed capital to bring an innovative coworking and neighborhood revitalization company called COhatch to the Tampa Bay region. COhatch’s owners prioritize city renewal as the center of its business operations. Rather than spreading locations across many cities, they place several locations in each city selected for business operations.
Once the city is selected, the COhatch team restores historically or architecturally significant buildings in a dozen or so strategic locations across the metro region. Each city is overseen by a market leader and each location features an onsite manager responsible for hospitality and building community.
In addition to the broad-based community renewal and economic development that is achieved through the building restoration and dynamic work and lifestyle environments, the COhatch impact strategy also includes:
To illustrate COhatch’s commitment to community, consider the story of Bar-B-Que King in West Tampa. Located in a neighborhood that is only a few miles from Tampa’s thriving economy, Bar-B-Que’s customers carry the burden of life expectancy 15 years or so less than their neighbors due to the consequences of intergenerational poverty.
It was James Bloomfield who brought joy to this neighborhood as he established himself as Tampa’s Bar-B-Que King in the 1960s. And today his great granddaughters Amelia Howard and Tiffany Powell are entrusted with his recipes and the family’s commitment to the neighborhood.
Mr. Bloomfield’s legacy was in danger when it’s building was deteriorating along with too many of the neighborhood’s surroundings. Enter COhatch. COhatch leaders John and Chris Watkins bought the building and offered to upgrade the restaurant at no cost to them to ensure that the family’s blessing to the neighborhood will continue for the next generation and beyond.
COhatch will be upgrading the Bar-B-Que’s kitchen along with new indoor and outdoor seating. And, in place of the vacant space alongside it today, the new COhatch space will offer vibrant new amenities such as meeting space, private offices and event rooms that will draw daily visitors (and many Bar-B-Que customers) from all across Tampa’s business community.
COhatch’s renovation of this property will also revitalize a neighborhood essential to the up-and-coming West River redevelopment featuring residences, offices, shops and riverfront activities. The building is surrounded by the city’s historic cigar factories and public artwork such as the “Faces of West Tampa” mural. Brian Sanders is a 5th generation Tampa resident who leads COhatch’s operations there. He said, “Historical reverence, responsible restoration, philanthropy and impact are hallmarks of the work COhatch does, and we’re excited to bring a business like that to town.”
Commonwealth’s third pitch competition was held in Raleigh and it drew inspiration from the adjacent “Research Triangle” —America’s largest research park driving innovations to help fuel our national economy. Under the direction of Commonwealth founding partner Cliff Benson III, Commonwealth made its first three investments in companies that represent a new type of triangle.
As depicted by the graphic below, Commonwealth’s first three investments each represent a distinct type of impact investing. Our first investment in NeighborHealth is a simple debt deal that illustrates the power of venture philanthropy offering a fix to one of America’s biggest drivers in health inequity. Our second investment in LoanWell is a traditional venture capital deal with social impact derived from a minority entrepreneur whose fintech solution provides significant upgrades in community lending. And the third deal, COhatch, is a late venture stage opportunity that produces distributions immediately with above market rate of return while providing measurable benefits to the nonprofit community.
Sovereign’s Capital partner Luke Roush has commented that many investors struggle to understand impact investing due to a lack of pattern recognition. Successful investors gain pattern recognition in their areas of expertise to manage risk-reward. Successful donors have a well-established pattern of making as much as they can so that they can give generously. But impact investing creates confusion by trying to converge those two patterns.
The “Raleigh Triangle” establishes a very helpful framework depicting a clear distinction between three types of double bottom-line returns that can guide investor strategies: strategic philanthropy that returns capital with impact; traditional venture with superior impact; and late venture or private equity with measurable impact.
The idea for Commonwealth’s venture philanthropy impact investment came from a group of Raleigh investors who were deeply burdened by the health inequalities experienced by low-income mothers. Due to deeply cumbersome procedures for Medicaid reimbursement, very few primary care doctors can find a sustainable way to provide care for these women and their children. This results in unnecessary trips to the Emergency Room for preventable disease, which leads to poor health outcomes and avoidable taxpayer burden.
Chris Evans, Cliff Benson and others commissioned Commonwealth to design a business model to establish a clinic delivering excellent care for these at-risk mothers and to pursue “look-alike” status as a federally qualified health center (FQHC) to ensure financial sustainability (Note: FQHC status allows the clinic to serve an underserved area or population with comprehensive care on a sliding fee scale backed by Medicaid and Medicare reimbursement).
“There’s a huge uninsured population and patients who have Medicaid in Wake County,” says Betsy Joiner of NeighborHealth. “We think everyone deserves access to good quality health care and medications they can afford.”
Commonwealth designed a business model that required $500,000 in seed capital to achieve FQHC look-alike status. We offered ten shares at $50,000 each via Donor Advised Funds. We asked each donor to assign $10,000 as a grant and $40,000 as a low interest loan.
There are many clinics in America that serve low-income patients through philanthropy. Commonwealth Raleigh donors proved that philanthropy could be used as seed capital that could be soon replaced by patient payments, private insurance and government program reimbursements.
Today the clinic operates in a bustling 16,000 square feet office with 70 staff. They serve more than 20,000 patients ranging from refugees who are meeting a doctor for the first time to mothers on Medicaid and others using private insurance to take advantage of the exemplary care. In addition to primary care, NeighborHealth offers pediatric and geriatric care, women’s health care, chronic disease management, counseling services, and a prescription drug discount program, among other services.
THE DEAL—VENTURE PHILANTHROPY: Commonwealth recruited 10 individuals who each invested $50,000 from their DAFs. This provided NeighborHealth with the seed capital necessary to launch. $10,000 of each investor’s “share” was a charitable gift, the remaining $40,000 became part of a $400,000 loan to NH at 3% interest. “This has to be one of the best ‘investments’ I have ever made,” said Tom Darden, founder of Cherokee Investment Partners. “The community impact is awesome, for so little startup money.”
Good healthcare is obviously one mark of a thriving community. Another is a healthy business sector, one in which all talented entrepreneurs have opportunity to launch and grow community-serving enterprises. A thriving economy requires adequate movement of capital. But across the nation, demand for affordable credit by entrepreneurs far outstrips the supply. According to Justin Straight, co-founder of LoanWell, “research indicates that about 70 percent of small business owners say that they do not have access to the level of funding they need.” The situation is even worse for female and minority entrepreneurs.
A vital group of organizations — Community Development Financial Institutions, or CDFIs — have stepped into this gap with the mission of directing capital investment to businesses facing barriers in obtaining credit from mainstream banks. The first CDFIs launched in 1994. Today, there are more than 1300 certified CDFIs. Scholars from the Richmond, VA Federal Reserve explain that “CDFIs offer more accessible terms than the traditional credit market to reach more minority clients….[They] also work to improve the accessibility of their products among minority-owned businesses with the goal of improving community economic outcomes.”
But CDFIs struggle to keep up with the needs of their target market. They often have limited staff and technological capacity. A 2019 study by the Fed found that the median number of employees at CDFIs is just 15. Two-thirds of CDFI leaders indicated they were “capacity constrained” in achieving their mission as aggressively as they desire.
Commonwealth Raleigh impact investors selected LoanWell as their venture capital solution to dramatically increase CDFIs’ capacity. “We’re an automated lending platform that enables community lenders to originate and service loans faster and more efficiently,” says Bernard Worthy, CEO. He points to client Thread Capital, a Raleigh-based CDFI focused on serving small businesses owned by people of color, women, and low-income individuals, as an example. “In 2019, Thread Capital made around 100 loans,” Worthy reports. “In 2020, they made about 3,000.” Thread Capital’s executive director Jonathan Brereton says this would not have happened without LoanWell. “We were able to process thousands of applications,” Brereton says. “Our old systems never would have made this possible.” Thread Capital’s story is not unique. A just-released study by the Urban Institute concluded that “technology solutions to improve CDFI efficiencies” are the key to helping CDFIs play their critical role in the small business space.
“By strengthening CDFIs, LoanWell is building muscle in communities that need it” -Bernard Worthy, CEO
THE DEAL—VENTURE CAPITAL: Commonwealth brought together local investors to learn about pressing challenges in the Triangle and the local entrepreneurs pioneering solutions to those thorny problems. After hearing about LoanWell, ten individuals invested in the company through convertible notes. LoanWell projects a return of 6-8% on this capital. LoanWell is on the vanguard of fighting the racial wealth gap in America according to Robert F. Smith, the wealthiest African American in the US and a noted private equity investor. He called CDFIs the “capillary banking systems” and says that “we have to invest in technology and software so that these ‘capillary banking systems’ are more efficient and they have more access to capital so they can engage with [businesses] that are underbanked.” That is exactly what LoanWell delivers.
The third point in Commonwealth Raleigh’s triangle features the COhatch opportunity pioneered by Commonwealth Tampa. This investment anticipates a very robust financial return while strengthening Raleigh-Durham’s entrepreneurial ecosystem through coworking spaces that facilitate community flourishing.
But can a coworking business really produce social impact? In addition to all the unique features of COhatch noted in the Tampa section above, the case for coworking is inherently persuasive:
After our successful investment in COhatch in Indianapolis, Tampa and Raleigh, Commonwealth was selected by COhatch’s owners—John Watkins and Chris Watkins—to sponsor their first national raise with the goal of securing $20M to fuel expansion in 15 cities. The investment round was over-subscribed at $22M with dozens of faith-driven investors and family office investment vehicles joining the Watkins’ community renewal mission.
After raising this round of funds, Commonwealth has established the CW City Fund to help COhatch and its investors realize the full promise of community renewal in all 15 cities. This fund will feature three key activities in each city:
· STRATEGIC CONVENING – we’ll co-host events in the cities similar to Commonwealth’s initial city-based pitch competitions to promote existing talent and opportunities.
· THOUGHT LEADERSHIP – Commonwealth produce research, offer consulting services and provide advisory services to investors and entrepreneurs seeks to renew their cities through impact investment.
· INVESTMENT – the CW City Fund will make impact investments across the 15 cities annually.
Commonwealth harnesses entrepreneurial talent to create more opportunities for everyone to flourish.
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